International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence

By Joshua Aizenman, Jaewoo Lee. Social Science Research Network, 2005

323 citations recorded by the source corpus.

This paper compares the importance of precautionary and mercantilist motives in the hoarding of international reserves by developing countries. Overall, empirical results support precautionary motives; in particular, a more liberal capital account regime increases international reserves. Theoretically, large precautionary demand for international reserves arises as a self-insurance to avoid costly liquidation of long-term projects when the economy is susceptible to sudden stops. The welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude.

Subfields: Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/49d405e205ef99b2b6ac33dfd58b915110a45c72

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Citations in the corpus

A Cross-Country Empirical Analysis of International Reserves (2009, background): “Aizenman and Lee (2007) empirically confirm the mercantilist motivation, but find that, compared with the precautionary demand, the mercantilist motivation accounts for a relatively small amount of international reserve hoarding. Other determinants for international reserve holding considered in rec”
International Reserves in Emerging Market Countries: Too Much of a Good Thing? (2007, background): “See Ben Bassat and Gottlieb (1992), Aizenman and Marion (2003), Lee (2004), Aizenman and Lee (2005), Garcia and Soto (2004), Jeanne and Rancière (2006), and Rodrik (2006) for precautionary and self-insurance models of international reserves hoarding.”
What Explains Global Exchange Rate Movements during the Financial Crisis (2009, unknown): “…and Marion (2003) stress that the accumulation of reserves in Emerging Asia can be rationalised by the desire for precautionary savings, while also Aizenman and Lee (2007) go in a similar direction and make the case that precautionary and not mercantilist reasons can account for the reserves…”
Capital Account Policies and the Real Exchange Rate (2012, unknown): “Most of those deposits are time and saving deposits that bear an interest rate.”
International Reserves and Rollover Risk (2013, unknown): “Aizenman and Lee (2007) study a Diamond-Dybvig type model where reserves serve as liquidity to reduce output costs during sudden stops. Hur and Kondo (2012) develop a model where reserves reduce the probability of a rollover crisis and show that learning about the sudden-stop process can account for”
The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications (2006, unknown): “Aizenman and Lee (2005) present a three-period stylized model of the optimal level of international reserves based on the Diamond-Dybvig model of banks runs.”
The social cost of foreign exchange reserves (2006, unknown): “Further, Aizenman & Lee (2005) provide some systematic evidence that suggests the self-insurance motive has been predominant as a driver of reserve accumulation.”
The financial resource curse (2013, unknown): “Finally, a recent literature (Aizenman and Lee, 2007; Benigno and Fornaro, 2012; Korinek and Servén, 2010) has used models with growth externalities to address the motives behind reserve accumulation.”
Financial versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding (2007, unknown): “As discussed earlier, Aizenman and Lee (2007) find that reserves accumulation is more closely associated with precautionary variables—which relate to financial mercantilism—than with variables that capture monetary mercantilism. Nor do we find evidence that China’s reserve accumulation was exception”
Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold? (2017, unknown): “Some papers have stressed the precautionary, self-insurance motive (see, Gourinchas and Obstfeld, 2012, for instance) while others have highlighted the mercantilist motive and the desire to avoid or limit exchange rate appreciation (Aizenman and Lee, 2007, Dooley et al, 2003).”
The Financial Crisis and Sizable International Reserves Depletion: From 'Fear of Floating' to the 'Fear of Losing International Reserves'? (2009, unknown): “Alternative explanations of IR hoarding however include the precautionary and/or mercantilist motives [Aizenman and Lee (2007, 2008)], and the Bretton Woods II interpretation [Dooley, Garber and (2003)].”